Valuation v. Insurance under Transit Coverage Form

Our insured owns a business and often has to ship packages. He has a transit coverage form that has a $1,000 deductible. He had to ship a package valued at $2,000, and purchased an increase in valuation from the standard $100 the shipper offered to $1,000, thinking that if the package was damaged he'd at least cover his deductible.

The package was destroyed, and the goods along with it. The goods were worth $2,034. When he reported the loss to his insurer, they paid him $34, claiming that the increased valuation was actually other insurance. So our insured is now $1,000 out of pocket. Can this be correct?